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Why We're Ungovernable, Part 4: Hollande's Short Honeymoon

By: John Rubino | Wednesday, November 14, 2012

The premise of this
series is that once a country's debt rises to a certain level,
the country becomes impossible to govern. Voters accustomed to a relatively
easy life based on other people's money won't accept the truth that they're
not actually rich, so each new leader sees his or her popularity plunge
almost immediately and their "reform" program, whatever it happens to be,
quickly discredited and abandoned. Now it's France's turn. From today's
Washington Post:

PARIS -- President Francois Hollande has suffered a dramatic decline in
popularity during his first six months as leader of France, failing to convince
much of the country that his Socialist government is capable of firm leadership
to overcome a persistent economic slump.

Recent opinion polls have shown Hollande sinking nearly 20 points in approval
ratings, to about 40 percent, with respondents from across the political
spectrum expressing disappointment as unemployment, which is above 10 percent,
continues to rise, factories close and growth remains elusive.

Hollande's friends and supporters have publicly urged the president to explain
more clearly how his decisions fit into a coherent plan for restoring France's
economic health.

In many ways, Hollande's fall from post-election grace reflects the simple
fact that he is in charge as Europe's debt crisis forces France and other
countries to raise taxes and cut back on cherished welfare expenditures.
But French analysts say it also stems from Hollande's tendency to keep his
options open as long as possible before making decisions, creating an impression
that his path is unclear, and from missteps.

"I understand the worries of the people and the doubts they may express
about the ability of politicians to meet the challenge," Hollande said in
a news conference Tuesday at the Elysee Palace.

In response, he rolled out a series of measures decided since he took office,
portraying them as a cohesive array designed to get the economy moving again
and bring the national debt under control. The effects of these efforts,
he added, should be judged at the end of his five-year mandate, not in the
first stretch.

"These choices are consistent with my commitments, with my goals and, most
important, with the interests of France," he said.

Some of the public's unease comes from the contrast between Hollande and
his predecessor, Nicolas Sarkozy, who was known for making swift and bold
decisions. Sarkozy, who was widely disliked by the end of his term, has enjoyed
a comeback in public opinion since his defeat in May, particularly among
his natural constituency of conservatives.

The latest Hollande measure to raise questions was an attempt to improve
the competitive position of France's small and medium-size industrial sectors
by lightening the heavy load of payroll taxes, which help pay for the generous
welfare system. Prime Minister Jean-Marc Ayrault announced last week that
firms making new hires would get tax rebates worth $26 billion beginning
in 2014 and that value-added taxes would be raised to pay for it.

Only months before, while running for president, Hollande had denounced
as grossly unfair a similar proposal by Sarkozy. Last week's announcement
was portrayed as a turnaround. The Socialist faithful grumbled that liberal
principles were being compromised by a gift to businesspeople that would
be paid for at the supermarket checkout counter.

"We have a left-wing president who, several months after taking power, engineers
a real cultural revolution, adopts a policy that is completely new for the
French left," Raymond Cayrol, a generally sympathetic political researcher,
told Le Figaro newspaper.

Jean-Luc Melenchon of the Leftist Front, whose followers mostly voted for
Hollande, called the program "a shame." Jean-Vincent Place, a senator from
the Socialist-allied Greens, wondered aloud whether his party's two ministers
should remain in the government.

From the right, critics predictably denounced the decision as too little,
too late. A report commissioned by Hollande, they noted, had recommended
$39 billion -- and in payroll tax cuts, not rebates. Moreover, they said,
if the economic situation is serious enough to require such a step, why should
businesses have to wait until 2014?

Francois Bayrou, a centrist leader, called the Hollande system "a gas machine." He
and others said the real hindrance to competitiveness is a bloated government
that accounts for more than half the economy, despite cutbacks.

"One day, instead of cold-cocking the country with taxes and fees, a French
statesman will have to slice, dice and cut amid the fat, the gelatin and
the girdles that strangle our economy," wrote Franz-Olivier Giesbert, editor
of the newsweekly Le Point.

Underlying much of the criticism is the impression that Hollande and his
lieutenants have underestimated the depth of Europe's economic crisis and
its effects in France. Hollande recently suggested, for instance, that the
slowdown is a question of economic cycles and that growth will soon return.
Unemployment will start to drop by the end of next year, he predicted.

At the same time, he and his finance minister, Pierre Moscovici, have insisted
that France will respect a commitment to the European Union to reduce the
government's budget deficit to 3 percent of gross domestic product by next
year. Some of Hollande's supporters have suggested that the goal is not realistic
unless growth returns, a prospect that, according to the International Monetary
Fund, the European Union and the Bank of France, is unlikely anytime soon.

Some thoughts

The above article doesn't explain what Hollande did in his first few months,
so very briefly: after inheriting a heavily indebted economy with the second
highest labor costs in the Eurozone (4 euros an hour higher than Germany's),
he chose from the standard socialist menu, raising taxes on the rich, promising
to increase the government's overall tax take from 45% of the economy to 47%,
and lowering the retirement age for many workers from 62 years to 60. This
of course failed to produce a burst of new hiring, and now, six months in,
he's already changing course and cutting taxes.

None of this will make a difference, though, which is the point: There is
no mix of mainstream policies capable of returning France back to the pre-crisis
days of steady growth and political quietude. Turmoil is the order of the day
until debt falls by half or more.

"Sarkozy, who was widely disliked by the end of his term, has enjoyed a
comeback in public opinion since his defeat in May..." This kind of instant
buyer's remorse is to be expected. The other guy always looks better than
the incumbent who is actually grappling with the country's problems.

The US election, which returned pretty much the same people to power, would
seem to discredit the "ungovernable" thesis, but in reality it just illustrates
the near-total cluelessness of the republicans. Space doesn't permit a full
accounting of their dumb (in some cases crazy) choices, but suffice it to say
that they managed to enrage Ron Paul supporters, women, and Hispanics for no
apparent reason, and still would have won had the same number of republicans
shown up to vote as in 2008. So watch the administration's approval ratings
going forward and note the similarities to Hollande's. But again - to avoid
an avalanche of right versus left name calling - this isn't about ideology.
Nothing that a majority of Americans would vote for will work, so we'll remain
ungovernable until the market puts an end to the age of fiat currency.

John Rubino is author of Clean Money: Picking Winners
in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's
James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday,
January 2008), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a currency trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and
a frequent contributor to Individual Investor, Online Investor,
and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.